Working on Commission: The Legal Basics

Working on commission generally involves earning a percentage of sales and performance. Some workers earn commission alone or in addition to a salary or hourly wage. Commission-based work can lead to fluctuating income. Commission workers should have a clear understanding of calculating commissions and their employment rights.

This page is an overview of calculating commissions, commission agreements, and how to recover unpaid commissions. Labor and wage laws can vary by state. To understand the legal basics of working on commission where you live, talk to a local wage and hour lawyer.

Understanding Commission-Based Pay

Commission is a way to compensate employees based on their job performance. Workers can earn a straight commission or a combination of wages or salary plus commission. The commission is generally for sales jobs, like earning a commission on the items they sell. Commissioned employees can also be involved in other types of work, such as:

• Getting new clients
• Making a certain number of sales
• Placing candidates
• Selling real estate

The commission structure is not a way for employers to avoid basic wage and hour laws. However, some workers on commission plans are exempt from overtime and minimum wage laws. Exemptions can depend on the type of work, regular rate of pay, and base salary.

Commissions are similar to non-discretionary bonuses. Salespersons should have their commission agreement in writing, with clearly defined goals and compensation. If an employer tries to cheat you out of your commission, you can file a wage and hour law complaint to get compensation.

Federal Regulations on Commission Compensation

The Fair Labor Standards Act (FLSA) requires that employers must pay non-exempt employees who work on a commission basis at a rate that is at least the federal minimum wage, currently $7.25 per hour. The FLSA also requires employees working more than 40 hours per week to be compensated at least one and one-half times their normal pay rate (time and a half).

Some commissioned workers are exempt from overtime labor laws. To be exempt from overtime, the employee must meet the following:

• The employee works for retail or service establishments
• More than half of the total compensation for a pay period comes from commissions
• The sales employee’s regular rate of pay must exceed 1.5 times the federal minimum wage for overtime hours

Outside salespeople also generally qualify as exempt from overtime hourly rate laws. Outside salespeople are regularly working away from the employer’s place of business and their primary duty is sales or contracts paid by the client.

How Commissions Are Calculated

There are different methods for calculating commissions. One of the simplest commission methods is based on a straight percentage of sales. For example, an employee earns a 10% straight commission on all sales. If the employee sells $5,000 in products, they get $500 in commission.

Another option is graduated commissions, with a higher commission for higher commission tiers. For example, a tiered 15% commission on the first $10,000 and a 20% commission for any sales over $10,000.

There are many variations of commission pay structures. Some employers offer bonus commissions on sales of a new product or hard-to-sell product. Some workers split commissions when more than one employee took part in the sale.

It is essential that both you and your employer keep clear records of work hours, commissioned sales, and compensation. These records can help resolve any disputes between employer and employee about unpaid commissions.

Key Elements of a Commission Agreement

The employment contract or commission agreement should spell out the pay structure terms. Key elements of a commission-based employee’s agreement include:

• The commission percentage
• Commission period
• Commission tiers
• Payment terms
• Deductions
• Overrides
• Hourly wages
• Salary or other bonuses

Common Issues with Commission Pay

Some employers try to use confusing commission agreements to withhold payment from workers. Unfortunately, many commission-based workers don’t pursue their legal rights because they don’t think it is worth the effort. However, a wage and hour claim allows you to recover back payment, additional penalties, and even legal fees. It can also stop the employer from ripping off other workers.

If you are a sales representative working on commission, look out for common issues, including:

• Your employer changes the commission calculation in the middle of a sales period
• The employer threatens to fire you if you pursue a wage law claim
• Withholding commission from workers reporting unsafe work conditions
• Employers failing to pay hourly wages for workers who don’t qualify for an exemption
• Misclassifying workers to avoid paying salary, wages, or benefits
• Lack of transparency for calculating commissions
• Delayed payments for earned commissions

If there is a dispute over an unpaid commission, you can contact your state labor law agency. You can file a complaint against your employer for non-payment of commission.

Employee Rights in Commission-Based Jobs

Employees have the right to compensation for their work. If the employer tries to avoid paying an agreed commission, the employee can take the employer to court for non-payment of commission. Employers who violate state labor laws may have to pay additional penalties, overtime pay, and pay the employee’s legal fees.

Talk to an employment lawyer about your employment rights in a commission-based job. Your attorney can explain your legal options and help you take court action. Your attorney can also negotiate to get compensation for your work. In some cases, your employer must pay your legal fees so you don’t have to pay them. For legal advice about unpaid commissions, talk to a local wage and hour law attorney.